Fair go on fees

I saw today that Choice and the Consumer Action Law Centre are running a campaign to make banks more transparent about the penalty fees which we all pay on our accounts. It’s called “Fair go on fees.”

I’m interested. I accidentally paid the rent twice over a few weeks back. In the process, I overdrew our account, and got charged a penalty fee. Oops. I was miffed.

Choice and CALC are questioning the legal basis upon which banks charge penalty fees. It’s fine for banks to charge customers a fee which represents a genuine pre-estimate of the loss caused by a default or breach of contract (sometimes called “liquidated damages”). However, “penalty” clauses, which seek to penalise the customer for the breach or default, are unenforceable by law, whether by principles of unconscionability (see eg. O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359; AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170; Esanda Finance Corporation v Plessnig (1989) 166 CLR 131) or pursuant to legislative provisions such as s 32W of the Fair Trading Act 1999 (Vic).

Banks call these charges by all kinds of names: “service fees”, “account overdrawn” or “honour fees”, “credit card late payment fees”, “cheque dishonour fees” and “direct debit dishonour fees”. But it doesn’t matter what they call them – what do they look like in substance? The problem is that it’s hard to know. Banks don’t like disclosing information about penalty fees.

The fact of the matter is that some of the penalty fees don’t seem to bear any relationship to a pre-estimate of loss suffered. And some bank fees are rising far in excess of inflation. Sounds unfair…and illegal.

Another problem is that you are more likely to end up paying these fees if you don’t have much money. If you’re a millionaire, you don’t have to worry if the rent is taken out twice, or if you are charged for someone else’s cheque bouncing, but if you haven’t got stacks of cash in your account, then…whoopsies, there’s a big negative bank balance there. So the vulnerable are penalised.

Choice and CALC argue that:

Banks and other financial institutions should:

• Eliminate inward cheque dishonour fees.
• Introduce systems to provide a greater range of options and real-time information to consumers where there are insufficient funds to make a due payment. These might include simply declining payments without charging a fee, an automated system to notify consumers by email or text message (or perhaps for concession card holders without electronic facilities, by phone), or by automated message via the ATM or EFTPOS system, before the payment is processed.
• Adopt one of the following responses to credit card over-the-limit and account overdrawn honour fees:
  • eliminate the fees altogether (we note that credit cards operated successfully in Australia for some 20 years without such fees)
  • offer consumers a choice between declining transactions (at no cost), or charging a reasonable fee no more than the actual cost to the bank or say 2-3% of the amount by which the consumer has exceeded the limit/overdrawn their account, whichever is lower.
• Ensure that all other penalty fees are limited to the actual costs incurred by the institution.

Sounds fair enough to me. If my bank had a policy like that in place, then my second mistaken rent payment wouldn’t have gone through. The bank would have contacted me by e-mail, perhaps, to let me know of my mistake. I would have said I didn’t want the second rental payment to go through. And then I wouldn’t have been charged a fee. Simple.

But unfortunately, it doesn’t seem to be about making things easier for the customer. Banks just want their pound of flesh.

After reading that Choice website, I think I might contact my bank about that recent account overdrawn fee, and ask for a refund. The worst they can say is “No”. And the best outcome is that community pressure could force banks to change. Yeah! Power to da people!

Genius does not equal money

A US study reportedly shows that people with high IQs are just as likely to get into financial difficulties as those with average or below average IQs. I’m glad to know that just because I haven’t made my first million yet, this doesn’t mean I’m dumb…

The study confirmed previous research which has shown that smarter people tend to earn more money, but pointed out there is a difference between high pay and overall wealth.

“The average income difference between a person with an IQ score in the normal range (100) and someone in the top two per cent of society (130) is currently between $US6,000 ($A7,200) and $US18,500 ($A22,250) per year,” it said.

“But when it came to total wealth and the likelihood of financial difficulties, people of below average and average intelligence did just fine when compared to the super-intelligent.”

An irregular pattern of total wealth as well as financial distress levels – such as maxed out credit cards, bankruptcy and missing bill payments – emerged among the various degrees of intelligence, the study said.

My observation would be that knowing how to handle money has nothing to do with intelligence, and everything to do with whether you are the kind of person who likes to face up to problems, or whether you just like to ignore them.

Financial problems sometimes arise through misfortune (eg, an illness, a redundancy, a marriage break-up). There’s not much you can do about that. But other times, I think financial problems arise because people just don’t want to think through the consequences of their actions. They don’t imagine that disaster could ever happen to them – financial ruin is something which happens to other people. They overextend themselves with a huge loan, not thinking about what will happen if interest rates rise. They buy that expensive plasma television using a credit card, without thinking that they’re just deferring payment of the television – without thinking that if they don’t have the money to pay for it this month, what’s going to be different about next month or the month after? It’s so easy to spend on a credit card – all that lovely available credit there, waiting to be used…When I first got a credit card in my 20s, I fell into the credit card trap myself.

I met with some of my old colleagues today. At one point we all worked in banking litigation. We discussed again the “head in the sand” phenomenon, and agreed that this seemed to pervade the behaviour of many of those who defaulted on loans.

As I’ve discussed before, there may be a positive side to having unrealistic expectations – I suspect many entrepreneurs succeed because they do not see risks as other people do, and forge ahead regardless. However, this is also a reason why some entrepreneurs end up in trouble – they keep going when any prudent person would wind up the business.

I’m no psychologist, but I wonder if there’s a reason for this function of the human brain which makes us put our head in the sand and pretend there is not a problem. I guess it has evolved as a necessary personality trait because it helps humans survive against the odds in terrible situations. But it also has its downsides when it means people deny that there is a problem, and that problem desperately needs to be dealt with.

Loan Fraud

Imagine the following scenario. You ask your Dad if he can offer up his property as security for a loan for your excellent business proposal, but he says “no”. So you get your wife’s workmate drunk and get him to pose as your “Dad” when you take out the loan. The mate signs the mortgage as “Dad”. The Bank gets a registered mortgage over your Dad’s property. Of course, the excellent business proposal isn’t really so excellent (maybe Dad actually knew a thing or two after all) and the business goes bust. The Bank goes to repossess your Dad’s property. There isn’t much Dad can do about it, because the mortgage is not void for fraud as long as it is registered (lawyers call it indefeasible title, we love to use long words).

Does this sound far-fetched to you? Are you thinking that surely the Bank would have some kind of procedures in place for identifying mortgagors, so that mortgages can’t be taken out by drunken imposters? Think again, and have a look at the case of Grgic v Australian and New Zealand Banking Group Ltd (1994) 33 NSWLR 202. The above scenario is taken straight from its pages.

That case always struck me as quite extraordinary. Accordingly, I read a recent submission from the South Australian Director of Public Prosecutions with great interest. The essence of the submission is that “identity theft” and “identity fraud” are on the rise. In fact, it is more common for loans to be taken out by non-existent people than by imposters. The submission says:

The credit worthiness of…[a loan applicant] is frequently determined by ‘credit scoring’ the application at a central office of the bank concerned, and only minimal verification checks are made with respect to the supporting documentation and personal details of the applicant.

It goes on to cite examples of organised criminal gangs setting up multiple loan frauds which were able to be operated for extended periods of time.

Now you might think, “Yeah, well, they’re only ripping off Banks; serves the Banks right for always ripping us off.” But such scams cost all of us money, as Bank fees have to increase to pay for non-recoverable loans and attendant litigation, the police have spend public money on investigating fraudulent conduct and prosecuting the offenders. Further, the money may be used for criminal purposes.

I think this issue also raises broader questions about the conduct of Banks. To my mind, there is a fundamental conflict of interest in the present way in which lenders give out loans. Bank staff often encourage customers to take out loans, the bigger the better. Sometimes Bank staff are quite aggressive in promoting of loan products, because after all, they get a commission for each loan they sign up. The fact that the customer may be overextending their financial capabilities can be ignored. From my experience in legal practice, I have observed situations where a borrower should never have received the loan in question: realistically, the borrower was never going to be able to pay off a loan of that magnitude. Why give a loan to a borrower who is on a knife’s edge? Interest rates rise by one quarter percent and the Sheriff will come knocking on the borrower’s door.

Signing up for a loan these days is supposed to be “easy”. You can do it over the phone or the Internet. I got a car loan two months ago without having to go into a Bank until I signed the documentation. And do you know what? They didn’t ask for identification when I went into the branch to sign the documents. I could have been an imposter. Or I could have taken out the loan without my husband’s knowledge and gotten someone else to impersonate him on the phone and in person. No one would have known.

And what about those letters which encourage you to raise the limit on your credit card? You’re managing to pay the credit card off…so let’s raise the limit so that you get into more debt and can’t pay off your card any more! I rip those letters up when I receive them: they seem deeply irresponsible to me. I have known people with financial problems where the Bank has just kept letting them raise the limit on credit cards without question, ultimately leading the person into financial disaster.

I think Banks have to be responsible about these issues. First, I think there should be better identification checks when people go to take out loans, credit cards or mortgages. Secondly, I think Banks should not encourage people to overextend themselves financially. It just leads to misery and heartache, and no one wins.

Update

A reader has asked if I have a secret source, or if I’m just clairvoyant. The answer is, of course, the latter. Yes, it seems banks are releasing more products to make it “easier” to expose yourself to massive debt in the ever more difficult quest to get a home. Why doesn’t the government deal with the source of the problem instead? (ie, negative gearing and tax deductions for landlords but not home owners)

I do think Banks should disclose commissions received by their staff. I also think unsolicited offers of credit cards should be banned.

Of course, you can’t protect everyone. But to say there is freedom of choice and that it’s up to people to make their own judgments on offers of loans assumes that everyone is a rational, financially astute person who makes judgments in their best interests. My experience as a lawyer tells me that often people are the very opposite, particularly those who get into trouble with money.